Real Estate Economics
Real Estate EconomicsIntroduction to Real Estate
Real Estate is, by definition, the land and everything that
is a part of it and the extent of one’s interest in it. The
word real in real estate stands for the fact that it is land
and different than personal property. It is real property,
property that is more or less immobile. The word estate in
real estate stands for the interest that one has in the
property. This definitions shows that real estate is a
different sort of property. It is property that may be
legally yours but it is still not your personal property.
Real Estate is land and property that can be acquired,
owned or transferred by both individuals and business.
There are rules and regulations to follow when performing
any one of those actions. These rules and regulations
become very important when discussing the balance in real
estate. But what is real estate? Real estate is the
process of purchasing real property and the problems and
steps that one must follow through with.
Elements of Real Estate
I.Home
When buying a new house there are many things that must be
solved before the deed can be signed to the proud new owner.
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Very few people have the financial means of making a
one-time full payment on a home. The price of living has
increased and so has the prices for homes. For many, the
only outlet to buy the house of their dreams is to go and
find a mortgage to finance their home.
The first thing the prospective homeowner does is go to his
bank and try to find a loan that is large enough and has the
right interest rate that he can use to buy a house that he
wants and can afford. In order to get the loan the future
owner must establish credit. He will be asked about income,
employment history and credit history. All of these
variables allow the bank to determining whether or not this
person will ever fully pay for the mortgage. Once the
loanee has established credit for the loan the amount of
money paid on each payment and the amount of time allowed to
pay the payment is determined by the bank and must be agreed
to buy the loanee. Most of the time it is a monthly payment
and is between 15 to 35 years. The mortgage is made of two
parts. There is the interest and there is the principal.
The principal is the amount of the loan still owed and the
interest is the fee that the bank sets in order for its
money to be used. The interest is often the only variable
in mortgages and signals the difference in the two main kind
of mortgages. The fixed-rate mortgage and the
adjustable-rate mortgage. With fixed-rate mortgage the
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interest rate stays the same over the life of the loan.
With an adjustable-rate mortgage, the interest rate can
change at the end of pre-determined intervals. The interest
rate is based on the published index on the current interest
rates. The effects of raised interest rates are most felt
in this type of mortgage. Before the mortgages final and
its terms become legal, the loanee must sing a promissory
note that obligates them to pay for the mortgage debt.
During the time that the loanee is paying for the mortgage
and thus, still paying for the house, he must promise to
keep the property insure against fire and other hazards. He
must also promise to pay for any of the property taxes.
When the mortgage is done and fully paid for, the ownership
belongs fully to the loanee.
However, if the owner fails to pay the mortgage payment or
misses a payment there is a late fee and the interest
percentage of the house may rise or the loan may be
foreclosed.. If the owner just totally can no longer afford
to make the payments the bank will seize the house and it
will be sold to satisfy the bank. The would-be owner will
lose the house and will lose any equity that has built up in
it. In times of unemployment, the foreclosure rate rises.
Foreclosure is usually a last resort for the bank and very
often if the loan becomes to hefty a price to pay, the
mortgage will be reopened and the loan payment schedule may
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be reworked to give the loanee a better chance to pay off
the loan.
II.Condominium
The condominium concept of ownership was introduced in the
United States in 1961. The Condominium concept entails that
there is separate ownership of individual apartments or
units in a multi-unit building. The purchaser of the
condominium becomes the owner of a particular unit and a
proportionate share in the common elements and facilities.
When purchasing the condominium it may be mortgaged. After
purchase the owner is required to pay the taxes and a fixed
monthly sum to maintain the common elements.
III.Cooperative Ownership
Cooperative Ownership seems very similar to the condominium
concept but it is, in fact, quite different. In Cooperative
ownership, the legal owner of the whole building is a
corporation. The purchaser of an apartment in the
corporate-owned building is actually buying stock in the
corporation. Not only does the purchaser get a stock
certificate. bit he also receives a permanent or temporary
deed of the apartment. The corporation owns all the units
and common areas. When paying the cost, it covers their
share of the single mortgage for the entire building, real
estate taxes, insurance, and the service and maintenance
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required by the common areas. When a cooperative unit is
sold, the seller surrenders his stock and deed back to the
corporation. There are many laws and regulations that
differ between states on the form and structure of
cooperative ownership.
IV.Commercial
Commercial Real Estate is real property owned by a business
venture like cooperative ownership, but it shares more of
the same aspects as Home Real Estate. The only real major
differences between Home and Commercial real estate is that
in commercial real estate the property may be financed
differently and they may receive certain tax breaks. Just
recently, companies have found easier ways of financing
their real estate. In lieu of cash payment, companies may
be giving out company stock options to the bank. The recent
boom of Silicon Valley is a very good example of this idea.
Silicon Valley has harbored the new technological wave of
industry and the home to many startup Internet and
technological companies. Because many of these companies
start with only an idea and no money, giving away company
stock is the only feasible alternative. For the banks it
can have it’s good and bad sides. If the company bankrupts,
the bank will lose valuable worth because of unusable stock.
But if the company succeeds then the bank could potentially
have a very valuable and profitable investment. It is a hit
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or miss situation. It is risky but then again so is any
investment. Commercial Real estate also includes the new
variable of taxes more up front. Very often cities will
grant business tax breaks if they promise to build an office
of factory in their town. When cities have valuable
industry it brings jobs and wealth to the city. Everybody
benefits because the city is being kept employed and the
company has workers to work. Because this mutual
relationship is more of a great benefit to the city, the
city will try to give lucrative incentives to court
commercial business.
Economics of Real Estate
The economics of real estate basically include how real
property is acquired and it’s affects on the economy. The
process between the sellers and buyers in the industry is
what the economics of real estate really is. It is a cycle
of business. Between the customers, banks, sellers, and
federal interest rates, there are so many different sorts of
information to gather in order to fully discuss this idea.
The cycle of new building and the tearing down of old homes
show how everything is a renewing cycle. The old buildings
must be teared down to make room for more profitable real
estate. Real estate is not only a revenue producer but also
a way for people to start a true home.
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I.Interest Rates
The economics of real estate are very complicated that has
many different variables that can affect it. The one
variable that puts the most stress on economics is the
interest rates. Depending on the mortgage, the interests
rates set by the Feds can have serious affects on peoples
abilities to pay off the loan. When interest rates are
raised it makes it more difficult for people to pay off the
loans because it raises the price of the each loan payment.
That is why the recent hikes in the interest rates have
affected the stability of the real estate industry. The
interest rate hikes are in response to the super fast growth
of the stock market. The stock market was out of control
and it was also causing the economy to grow to fast for it’s
own good. When the economy grows to fast, the risk of
inflation rises and can cause our money to be worth less.
By raising the interest rates people have had to pay more on
their loans and thus have had less money to spend and it can
be seen in how the stock market has dropped. There is less
money to go around and is instead going to the banks.
II.Loans
These loans have a great affect on the economy. The loans
given out by banks keep our nations banking system running.
When banks give out loans they expect to make money in the
end. Because there is an interest fee put on all loans, at
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the end of the loan schedule the bank will have made money.
Only banks have the sort of money to give as loans. They
are counting on the ability of the people to pay back the
loan. The banks use the money from customers deposits and
transfer those funds into money that they can loan out.
This whole system of borrowing is very good and beneficial
for both parties. The bank makes money off the loan
customer and can use the profit to fund more profitable
loans. The loan customer is given the money that he will
make in the future to pay for something that he needs now.
In reality, when the loan customer signs the mortgage they
are also mortgaging their future. When signing the contract
the customer must realize that this contract states that for
many, many years, they must continue to make every payment
everytime. They have to have the faith that they will
continue to make money and pay back the loan. The banks
must trust the customer that they will get paid back and the
customer must trust themselves that they will make all
payments.
III.Unemployment
The unemployment rate in the nation can signal serious
problems in the economy. When the unemployment rate rise so
does the foreclosure rate in real estate. When unemployment
rises it lowers the peoples abilities to pay back their
loan. If during that time period, unemployment is a serious
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problem it can wreak havoc on the nations banking system.
The banks only survive because people have to make their
payments. If banks cannot receive the money back from their
loans, they fail. So if banks fail to collect loans, they
will go under and ruin the stability of the country.
IV.Real Estate Tax
Real estate tax is a tax levied upon real property. In the
United states, the real estate tax has been the chief method
of collecting local revenue. It accounts for more that 25
percent of all state and local government receipts. The tax
may be assessed on the sale value of the property, although
a better method would be on the classification of the land
according to its productiveness. The effects of the real
estate tax greatly affect the economy. By being such a good
revenue producers it gives a valuable source of tax dollars.
By becoming the primary source of tax money, it is the most
important tax in keeping our nation going. The tax dollars
are used to pay for government services that the public
needs. If there was no real estate industry the nation
could not function so it’s importance is extreme. In
commercial real estate especially the real estate tax can
become an important variable. Often the real estate tax may
be lessened for certain real estate if a company promises to
bring industry to the are. The local governments realize
that the profit brought in by a new business is more
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profitable than the taxes that could be imposed on the
building. Business bring in business and jobs and put money
into the city that just filters through and can rejuvenate a
town. Then by bringing in the business it jump-starts the
economy and by weighing out the different options, the town
can make the greatest profit. Either by taxing or buy the
money that the new business can bring.
Real Estate Conclusion
In conclusion, there are many different parts that
constitute real estate. There are different forms of real
estate but all share many of the same characteristics. The
cost of real estate is what is determining the economics of
real estate. The balance and cycle of purchasing and
selling real estate shapes the industry and economics.